On Tuesday, when the government publishes its Climate Change Bill, we will set out to become the first country in the world to establish in law a timetable to become a low-carbon economy. The bill will enshrine our determination to reduce carbon dioxide emissions by 60% by 2050, with interim goals as well as annual reporting to parliament to help us get there.

The benefits will be threefold. By creating a long-term trajectory for emissions reductions we avoid damaging lurches in policy. By providing a framework for business we give incentives for technological innovation. By showing that we are serious about emissions reductions, we get a fighting chance of bringing India and China on board.

The energy security and climate change rationale for a low-carbon economy is overwhelming. But its achievement will require political left and right to drop their shibboleths. The left needs to embrace markets, individual empowerment and nuclear power; the right needs to embrace Europe, social justice and wind farms. No wonder climate change is classic territory for thinking that is bold Labour not old Labour.

The starting point for Britain’s transformation into a low-carbon economy is mundane. Energy efficiency is the Cinderella of climate change policy. But 8m cavity walls and millions more roofs without insulation offer us the chance to save money and help the environment. But we need to go much further.

Britain’s energy mix is wrong — low-carbon nuclear is declining and renewables produce less than 5% of electricity, with coal and gas filling the gap. Yet wind energy worth one-fifth the electricity baseload is held up in the planning system. Tidal power is an obvious option for an island nation. And carbon capture and storage technology — which buries underground 85%-90% of the carbon emissions from coal-fired power stations — is already being used in Norway. In transport the Lotus-built Tesla is a fully electric car with a top speed of over 130mph and a battery range of up to 250 miles. In Brazil three-quarters of the cars run on ethanol. It is not utopian to think of Britain becoming a “postoil economy” over the next 20 years.

The practical solutions to climate change exist or are on the horizon. The question is to how to get people, businesses and government to drive the change.

Government targets are not enough. Nor is David Cameron’s exhortation to social responsibility — it’s nice to have but insufficient. The instinct of progressives to set high and rising standards for goods and services makes sense — hence mandatory emissions levels for cars, mandatory carbon capture fittings for power stations (both agreed in Brussels last week) and tighter building regulations until from 2016 every new home is a zero-carbon home.

But the world’s greatest market failure — as Sir Nicholas Stern said of global warming — needs the power of the market to be redirected to climate stabilisation. Carbon trading puts a price on pollution. It already exists in Europe, through the EU Emissions Trading Scheme, and covers half of the UK’s greenhouse gas emissions. Done right, it will drive the private sector to meet scientific goals and generate funding for investment in low-energy infrastructure in the developing world. London is the best place in the world to develop the market.

Within an overall “carbon budget”, companies are allocated carbon allowances, declining each year, as the carbon budget gets tighter. Companies that cut their emissions get to sell their spare allowances and make money. Those that do not can buy allowances. Carbon markets offer efficient ways of cutting our environmental footprint, but they require government to create and enforce them.

The Climate Change Bill will set out “enabling powers” that will allow government to bring forward schemes to extend carbon trading across the economy. The priority in the short term will be to extend carbon trading across main carbon-emitting industries. So in the EU, we want to see aviation brought into the Emissions Trading Scheme. We are also consulting on a UK carbon trading scheme for 5,000 large organisations.

In the long term, however, the implications could be even more radical. Carbon trading could be extended to emissions by individuals, which account for 44% of UK emissions. Each of us could have a personal carbon allowance, with those whose carbon footprint is less than their allowance able to earn money selling their allowances to those who need more. The Tyndall Centre suggests this would be broadly socially progressive — in general the poorer you are, the lower your emissions.

The main barrier is the transaction costs of creating a new system. But with a new credit card called Ice about to be launched that will automatically count up your carbon emissions when you buy products, even this barrier does not seem insurmountable. If the banking system automatically can count up your carbon footprint, at least on the four main transactions that account for most of our carbon — electricity, gas, petrol and aviation — personal carbon trading could be a long-term option.

We need political parties to challenge their ideological traditions and make the tough decisions that this challenge requires. In practice, that means helping new wind farms through the planning system and accepting that nuclear power will be part of the energy mix of the future. It means accepting that carbon markets are the future.

The only way they can be created is by an active state and an active European Union.

David Miliband is secretary of state for the environment. See his blog at www.davidmiliband.defra.gov.uk

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